<DOCUMENT>
<TYPE>10-Q
<SEQUENCE>1
<FILENAME>q2-10q.txt
<DESCRIPTION>QUARTERLY REPORT FOR PERIOD ENDED JULY 1, 2001
<TEXT>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended July 1, 2001
----------------------------
or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from to
------------- ------------
Commission File Number: 0-19542
AVADO BRANDS, INC.
(Exact name of registrant as specified in its charter)
Georgia 59-2778983
---------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Hancock at Washington, Madison, GA 30650
---------------------------------------- ------------------------------------
(Address of principal executive offices) (Zip Code)
706-342-4552
--------------------------------------------------
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
X Yes No
---- ----
As of August 17, 2001, there were 28,671,983 shares of common stock of the
Registrant outstanding.
<PAGE>
AVADO BRANDS, INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED JULY 1, 2001
INDEX
Part I - Financial Information Page
Item 1 - Consolidated Financial Statements:
Consolidated Statements of Earnings...............................3
Consolidated Balance Sheets.......................................4
Consolidated Statements of Shareholders' Equity
and Comprehensive Income.......................................5
Consolidated Statements of Cash Flows.............................6
Notes to Consolidated Financial Statements........................7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations....................12
Item 3 - Quantitative and Qualitative Disclosures About Market Risk.......17
Part II - Other Information
Item 4 - Submission of Matters to a Vote of Security Holders..............18
Item 6 - Exhibits and Reports on Form 8-K.................................18
Signature.....................................................................19
Page 2
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Earnings
(Unaudited)
<CAPTION>
(In thousands, except per share data) Quarter Ended Six Months Ended
---------------------------------------------------------------------------------------------- ------------------------------
July 1, July 2, July 1, July 2,
2001 2000 2001 2000
---------------------------------------------------------------------------------------------- ------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Canyon Cafe $ 8,015 9,731 16,883 20,023
Don Pablo's 73,484 77,098 147,155 152,683
Hops 48,081 46,772 100,215 92,954
McCormick & Schmick's 47,006 40,878 89,716 75,839
---------------------------------------------------------------------------------------------- ------------------------------
Total restaurant sales 176,586 174,479 353,969 341,499
---------------------------------------------------------------------------------------------- ------------------------------
Restaurant operating expenses:
Food and beverage 50,136 49,734 100,244 97,603
Payroll and benefits 57,174 54,690 114,396 107,205
Depreciation and amortization 5,699 6,296 11,628 12,290
Other operating expenses 46,364 40,398 91,376 79,522
---------------------------------------------------------------------------------------------- ------------------------------
Total restaurant operating expenses 159,373 151,118 317,644 296,620
---------------------------------------------------------------------------------------------- ------------------------------
General and administrative expenses 7,970 7,835 16,712 18,338
Other special charges 850 4,049 1,250 4,049
---------------------------------------------------------------------------------------------- ------------------------------
Operating income 8,393 11,477 18,363 22,492
---------------------------------------------------------------------------------------------- ------------------------------
Other income (expense):
Interest expense, net (10,347) (9,707) (19,378) (18,524)
Distribution expense on preferred securities (1,202) (2,013) (2,446) (4,025)
Gain (loss) on disposal of assets (388) (1,701) 361 (1,701)
Other, net (3,730) (1,046) (5,719) (2,019)
---------------------------------------------------------------------------------------------- ------------------------------
Total other income (expense) (15,667) (14,467) (27,182) (26,269)
--------------------------------------------------------------------------------------------- -------------------------------
Earnings (loss) before income taxes (7,274) (2,990) (8,819) (3,777)
Income taxes (2,425) (1,325) (2,925) (1,575)
---------------------------------------------------------------------------------------------- ------------------------------
Net earnings (loss) $ (4,849) (1,665) (5,894) (2,202)
============================================================================================== ==============================
Basic earnings (loss) per common share $ (0.17) (0.07) (0.21) (0.09)
============================================================================================== ==============================
Diluted earnings (loss) per common share $ (0.17) (0.07) (0.21) (0.09)
============================================================================================== ==============================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 3
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Balance Sheets
(Unaudited)
<CAPTION>
(In thousands, except share data)
--------------------------------------------------------------------------------------------------------------------
July 1, Dec. 31,
2001 2000
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 384 402
Accounts receivable 5,737 7,621
Inventories 7,263 9,418
Prepaid expenses and other 5,336 3,535
Assets held for sale 115,765 13,855
--------------------------------------------------------------------------------------------------------------------
Total current assets 134,485 34,831
Premises and equipment, net 313,801 379,938
Goodwill, net 73,624 132,012
Deferred income tax benefit 18,900 18,900
Other assets 42,431 44,000
--------------------------------------------------------------------------------------------------------------------
$ 583,241 609,681
====================================================================================================================
Liabilities and Shareholders' Equity
Current liabilities:
Accounts payable $ 10,513 31,568
Accrued liabilities 64,288 64,567
Current installments of long-term debt 95,850 15,034
Income taxes 27,046 30,164
--------------------------------------------------------------------------------------------------------------------
Total current liabilities 197,697 141,333
Long-term debt 215,743 291,507
Other long-term liabilities 14,946 16,024
--------------------------------------------------------------------------------------------------------------------
Total liabilities 428,386 448,864
--------------------------------------------------------------------------------------------------------------------
Company-obligated mandatorily redeemable preferred securities
of Avado Financing I, a subsidiary holding solely Avado
Brands, Inc. 7% convertible subordinated debentures
due March 1, 2027 68,584 72,865
Shareholders' equity:
Preferred stock, $0.01 par value. Authorized 10,000,000 shares;
none issued - -
Common stock, $0.01 par value. Authorized - 75,000,000 shares;
issued - 40,478,760 shares
outstanding - 28,634,131 shares in 2001 and 28,206,673 in 2000 405 405
Additional paid-in capital 146,419 147,809
Retained earnings 94,677 100,571
Treasury stock at cost; 11,844,629 shares in 2001 and 12,272,087 in 2000 (155,230) (160,833)
--------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 86,271 87,952
--------------------------------------------------------------------------------------------------------------------
$ 583,241 609,681
====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 4
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Shareholders' Equity and Comprehensive Income
(Unaudited)
<CAPTION>
Additional Total
Common Stock Paid-in Retained Treasury Shareholders'
(In thousands) Shares Amount Capital Earnings Stock Equity
-------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 2000 40,479 $405 $147,809 $100,571 ($160,833) $87,952
-------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - - - (1,045) - (1,045)
Conversion of convertible preferred securities - - 329 - 3,638 3,967
Common stock issued to benefit plans - - (1,422) - 1,483 61
-------------------------------------------------------------------------------------------------------------------------------
Balance at April 1, 2001 40,479 405 146,716 99,526 (155,712) 90,935
-------------------------------------------------------------------------------------------------------------------------------
Net earnings (loss) - - - (4,849) - (4,849)
Conversion of convertible preferred securities - - 14 - 155 169
Common stock issued to benefit plans - - (311) - 327 16
-------------------------------------------------------------------------------------------------------------------------------
Balance at July 1, 2001 40,479 $405 $146,419 $94,677 ($155,230) $86,271
===============================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 5
<PAGE>
<TABLE>
Avado Brands, Inc.
Consolidated Statements of Cash Flows
(Unaudited)
<CAPTION>
(In thousands) Six Months Ended
---------------------------------------------------------------------------------------------------------------------
July 1, July 2,
2001 2000
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss) $ (5,894) (2,202)
Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:
Depreciation and amortization 16,159 16,181
Loss (gain) on disposal of assets (361) 1,701
Mark-to-market adjustment on interest rate swap (86) -
Other special charges 1,250 4,049
(Increase) decrease in assets:
Accounts receivable (768) (2,515)
Inventories (60) (724)
Prepaid expenses and other (3,576) 316
Increase (decrease) in liabilities:
Accounts payable (7,958) 769
Accrued liabilities 6,631 (7,322)
Income taxes (3,118) 1,464
Other long-term liabilities (163) (31)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 2,056 11,686
---------------------------------------------------------------------------------------------------------------------
Cash flows from investing activities:
Capital expenditures (12,358) (31,547)
Proceeds from notes receivable and disposal of assets, net 7,206 3,238
Investments in and advances to unconsolidated affiliates - (531)
Additions to noncurrent assets (1,902) (1,956)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (7,054) (30,796)
---------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from (repayment of) revolving credit agreements 4,993 8,244
Principal payments on long-term debt (13) (11)
---------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 4,980 8,233
---------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (18) (10,877)
Cash and cash equivalents at the beginning of the period 402 11,267
---------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents at the end of the period $ 384 390
=====================================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
Page 6
<PAGE>
AVADO BRANDS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
July 1, 2001
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Article 10 of
Regulation S-X promulgated by the Securities and Exchange Commission.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for annual financial statement
reporting purposes. However, there has been no material change in the
information disclosed in the consolidated financial statements included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2000,
except as disclosed herein. In the opinion of management, all adjustments,
consisting only of normal recurring accruals, considered necessary for a fair
presentation have been included. Operating results for the quarter and six-month
period ended July 1, 2001 are not necessarily indicative of the results that may
be expected for the year ending December 30, 2001.
NOTE 2 - LONG-TERM DEBT
On April 2, 2001, the Company executed an amended and restated credit
agreement which provided a revolving line of credit of $95.8 million and letters
of credit of $10.9 million. The revolver included scheduled commitment
reductions of $10.0 million on May 31, 2001, September 4, 2001 and December 31,
2001. The remaining commitment of $65.8 million was to mature on March 29, 2002.
In connection with the pending sale of McCormick & Schmick's, during June the
Company executed an addendum to the credit agreement which retroactively waived
the May 31, 2001 commitment reduction. The addendum also accelerated the
maturity of the revolving credit facility to August 21, 2001 at which point
those obligations due under the facility shall be payable in full. At July 1,
2001 the facility was fully drawn. The credit agreement includes various
provisions which, among other things, require the Company to (i) maintain
defined net worth and coverage ratios, (ii) maintain defined leverage ratios and
(iii) achieve a defined quarterly earnings before interest, taxes, depreciation
and amortization ("EBITDA") amount. At July 1, 2001, the Company was not in
compliance with the EBITDA requirement.
The Company anticipates substantially completing the sale of 33 of its 34
McCormick & Schmick's restaurants during August 2001. Estimated proceeds of
$119.3 million from the initial transaction will be used to repay the amount
outstanding under revolving credit portion of the credit facility thereby
terminating the lenders' obligation to make further revolving loans under the
agreement. The lenders under the facility are expected to continue to provide
approximately $10.9 million in letters of credit that secure the Company's
self-insurance programs. Of the remaining sale proceeds of $23.5 million, $6.0
million will be used to partially cash collateralize the letters of credit, $6.3
million will be used to satisfy the Company's portion of outstanding obligations
related to McCormick & Schmick's, $4.3 million will be used to pay fees and
expenses associated with the transaction and the balance will be available for
past due amounts. The remaining restaurant is located in an area where transfer
of permits to the new owners is a more lengthy process and, as a result, the
closing on that restaurant, with proceeds totaling $4.2 million, is expected in
the fourth quarter of 2001. The Company anticipates using these proceeds to more
fully cash collateralize its letters of credit. If the Company is unable to
complete the closing of the McCormick & Schmick's transaction prior to the
August 21, 2001 maturity of its credit facility, management believes it will be
able to extend the agreement.
Interest payments on senior and subordinated notes approximate $11.6
million semi-annually in each June and December. Under the terms of the related
note indentures, the Company has an additional 30-day period from the scheduled
interest payment dates before an event of default is incurred and the Company
utilized these provisions with respect to its June 2001 interest payments.
Accordingly, the interest payment related to the senior notes was made on June
26, 2001 and the interest payment related to the subordinated notes was made on
July 16, 2001.
As a result of the deferral of the June 2001 interest payment on the
subordinated notes to the third quarter, total interest payment requirements for
the second half of 2001, including estimated interest related to the revolving
credit facility incurred prior to repayment, will be approximately $18.7
million. In addition, maintenance capital is expected to approximate $4 to $6
Page 7
<PAGE>
million. Management believes that cash flow from operations and the sale of
other assets should be sufficient to satisfy its interest obligations and
projected capital expenditures remaining in 2001. Excluding the McCormick &
Schmick's division, assets held for sale totaled $8.1 million at July 1, 2001.
The following table presents semi-annual, pro forma earnings before interest,
taxes, depreciation and amortization ("EBITDA"), assuming the sale of McCormick
& Schmick's had been completed as of the beginning of the periods presented
(amounts in thousands):
Six Months Six Months Six Months
Ended Ended Ended
July 1, 2001 July 2, 2000 Dec. 31, 2000
------------------------------------------------------------------------------
Consolidated EBITDA $ 32,213 39,505 15,554
McCormick & Schmick's EBITDA 11,636 8,868 11,540
------------------------------------------------------------------------------
Pro forma EBITDA $ 20,577 30,637 4,014
==============================================================================
The Company is estimating EBITDA for the six months ended December 30, 2001
of approximately $13.5 million, which includes EBITDA of $3.0 million related to
the pre-sale operations of McCormick & Schmick's. While management believes that
cash flow from operations supplemented by proceeds from the sale of closed
restaurant properties and other assets held for sale will be sufficient to
enable the Company to meet its obligations, these proposed asset sales are not
presently subject to binding agreements. There can be no assurance that the
Company will be able to satisfy its interest obligations and capital expenditure
requirements in 2001 without generating proceeds from sales of these assets or
from raising additional debt or equity capital.
NOTE 3 - SUPPLEMENTAL CASH FLOW INFORMATION
For the six months ended July 1, 2001 and July 2, 2000, the following
supplements the consolidated statements of cash flows (amounts in thousands):
2000 2001
----------- -----------
Interest paid (net of amounts capitalized) $ 11,501 17,702
Distributions paid on preferred securities $ - 4,025
Income taxes paid (refunded) $ 193 (3,039)
NOTE 4 - ASSET REVALUATION AND OTHER SPECIAL CHARGES
Other special charges of $1.3 million in 2001 include severance costs of
approximately $0.7 million associated with the elimination of certain management
positions in the first quarter of 2001 and $0.6 million related to an abandoned
site.
In 2000, asset revaluation and other special charges totaled $38.2 million.
These charges, which were predominately noncash, primarily reflected the
decision to close 13 underperforming restaurants and asset revaluation charges
related predominately to the decrease in planned new restaurant development. At
December 31, 2000, accruals related to these charges totaled $6.0 million.
During the first six months of 2001, cash payments of approximately $2.6 million
reduced the accruals to approximately $3.4 million.
NOTE 5 - DISPOSAL OF ASSETS
Loss on disposal of assets for the quarter ended July 1, 2001 reflects the
net result of the sale of an office facility in Bedford, Texas and the sale of
various other closed restaurant properties and miscellaneous assets.
NOTE 6 - INCOME TAXES
Income tax benefit represents the effective rate of benefit on loss before
income taxes for the first six months of 2001. The tax rate is based on the
expected rate for the full-fiscal 2001 year.
NOTE 7 - CONTINGENCIES
In 1997, two lawsuits were filed by persons seeking to represent a class of
shareholders of the Company who purchased shares of the Company's common stock
between May 26, 1995 and September 24, 1996. Each plaintiff named the Company
and certain of its officers and directors as defendants. The complaints alleged
acts of fraudulent misrepresentation by the defendants which induced the
plaintiffs to purchase the Company's common stock and alleged illegal insider
Page 8
<PAGE>
trading by certain of the defendants, each of which allegedly resulted in losses
to the plaintiffs and similarly situated shareholders of the Company. The
complaints each sought damages and other relief. In 1998, one of these suits
(Artel Foam Corporation Pension Trust, et al. v. Apple South, Inc., et al.,
Civil Action No. CV-97-6189) was dismissed. An amended complaint, styled John
Bryant, et al. vs. Apple South, Inc., et al. consolidating previous actions was
filed in January 1998. During 1999, the Company received a favorable ruling from
the 11th Circuit Court of Appeals relating to the remaining suit. As a result of
the ruling, the District Court again considered the motion to dismiss the case,
and the defendants renewed their motion to dismiss in December 1999. In June
2000, the District Court dismissed with prejudice the remaining suit. The
plaintiffs have appealed the court's final decision. Although the ultimate
outcome of the suit cannot be determined at this time, the Company believes that
the allegations therein are without merit and intends to continue vigorously
defending itself.
NOTE 8 - INTEREST RATE SWAP
As of the beginning of the fourth quarter of 2000, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities", and its amendments SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of SFAS No. 133" and SFAS No. 138, "Accounting for Derivative
Instruments and Certain Hedging Activities", (collectively referred to as SFAS
133). SFAS 133 requires all derivative financial instruments to be recognized in
the consolidated financial statements at fair value regardless of the purpose or
intent for holding the instrument. The adoption of SFAS 133 was recorded as a
cumulative effect of change in accounting principle and resulted in a cumulative
effect charge of $10.0 million ($6.3 million net of tax benefit) which was
recorded in the fourth quarter of 2000.
At July 1, 2001, the settlement or fair market value of the interest rate
swap was $8.8 million and is included in other long-term liabilities in the
accompanying consolidated balance sheet. The mark-to-market adjustment of $0.1
million was recorded as a reduction of interest expense.
NOTE 9 - GUARANTOR SUBSIDIARIES
The Company's senior notes and revolving credit facilities are fully and
unconditionally guaranteed on a joint and several basis by substantially all of
its wholly owned subsidiaries. Such indebtedness is not guaranteed by the
Company's non-wholly owned subsidiaries. These non-guarantor subsidiaries
primarily include certain partnerships of which the Company is typically a 90%
owner. At July 1, 2001 and December 31, 2000, these partnerships in the
non-guarantor subsidiaries operated 60 and 61, respectively, of the Company's
restaurants. Accordingly, condensed consolidated balance sheets as of July 1,
2001 and December 31, 2000, and condensed consolidated statements of earnings
and cash flows for the six months ended July 1, 2001 and July 2, 2000 are
provided for such guarantor and non-guarantor subsidiaries. Corporate costs
associated with the maintenance of a centralized administrative function for the
benefit of all Avado restaurants have not been allocated to the non-guarantor
subsidiaries. In addition, interest expense has not been allocated to the
non-guarantor subsidiaries. Separate financial statements and other disclosures
concerning the guarantor and non-guarantor subsidiaries are not presented
because management has determined that they are not material to investors. There
are no contractual restrictions on the ability of the guarantor subsidiaries to
make distributions to the Company.
<TABLE>
Condensed Consolidated Statement of Earnings
Six Months Ended July 1, 2001
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 274,968 79,001 - 353,969
Restaurant operating expenses 244,982 72,662 - 317,644
General and administrative expenses 13,158 3,554 - 16,712
Other special charges 1,250 - - 1,250
--------------------------------------------------------------------------------------------------------------------
Operating income 15,578 2,785 - 18,363
--------------------------------------------------------------------------------------------------------------------
Other income (expense) (26,746) (436) - (27,182)
Earnings (loss) before income taxes (11,168) 2,349 - (8,819)
Income taxes (3,700) 775 - (2,925)
--------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (7,468) 1,574 - (5,894)
====================================================================================================================
</TABLE>
Page 9
<PAGE>
<TABLE>
Condensed Consolidated Statement of Earnings
Six Months Ended July 2, 2000
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales $ 270,021 71,478 - 341,499
Restaurant operating expenses 233,340 63,280 - 296,620
General and administrative expenses 15,186 3,152 - 18,338
Other special charges 4,049 - - 4,049
--------------------------------------------------------------------------------------------------------------------
Operating income 17,446 5,046 - 22,492
--------------------------------------------------------------------------------------------------------------------
Other income (expense) (25,552) (717) - (26,269)
Earnings (loss) before income taxes (8,106) 4,329 - (3,777)
Income taxes (3,375) 1,800 - (1,575)
--------------------------------------------------------------------------------------------------------------------
Net earnings (loss) $ (4,731) 2,529 - (2,202)
====================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Balance Sheet
July 1, 2001
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 130,622 3,863 - 134,485
Premises and equipment, net 282,773 31,028 - 313,801
Goodwill, net 52,090 21,534 - 73,624
Deferred income tax benefit 18,900 - - 18,900
Other assets 37,083 5,348 - 42,431
Intercompany investments 48,099 - (48,099) -
Intercompany advances 7,837 - (7,837) -
--------------------------------------------------------------------------------------------------------------------
$ 577,404 61,773 (55,936) 583,241
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 192,940 4,757 - 197,697
Long-term liabilities 229,609 1,080 - 230,689
Intercompany payables - 7,837 (7,837) -
Convertible preferred securities 68,584 - - 68,584
Shareholders' equity 86,271 48,099 (48,099) 86,271
--------------------------------------------------------------------------------------------------------------------
$ 577,404 61,773 (55,936) 583,241
====================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Balance Sheet
December 31, 2000
<CAPTION>
--------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
--------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
Current assets $ 32,449 2,382 - 34,831
Premises and equipment, net 347,646 32,292 - 379,938
Goodwill, net 110,164 21,848 - 132,012
Deferred income tax benefit 18,900 - - 18,900
Other assets 38,419 5,581 - 44,000
Intercompany investments 46,525 - (46,525) -
Intercompany advances 12,010 - (12,010) -
--------------------------------------------------------------------------------------------------------------------
$ 606,113 62,103 (58,535) 609,681
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities $ 138,011 3,322 - 141,333
Long-term liabilities 307,285 246 - 307,531
Intercompany payables - 12,010 (12,010) -
Convertible preferred securities 72,865 - - 72,865
Shareholders' equity 87,952 46,525 (46,525) 87,952
--------------------------------------------------------------------------------------------------------------------
$ 606,113 62,103 (58,535) 609,681
====================================================================================================================
</TABLE>
Page 10
<PAGE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 1, 2001
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ (2,876) 4,932 - 2,056
Cash flows from investing activities:
Capital expenditures (11,597) (761) - (12,358)
Proceeds from disposal of assets, net 7,206 - - 7,206
Other investing activities (1,902) - - (1,902)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (6,293) (761) - (7,054)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from revolving credit agreeements 4,993 - - 4,993
Principal payments on long-term debt (13) - - (13)
Proceeds from (payment of) intercompany
advances 4,173 (4,173) - -
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 9,153 (4,173) - 4,890
-------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (16) (2) - (18)
Cash and equivalents at the beginning of the period 310 92 - 402
-------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 294 90 - 384
=========================================================================================================================
</TABLE>
<TABLE>
Condensed Consolidated Statement of Cash Flows
Six Months Ended July 2, 2000
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------
Guarantor Non-Guarantor
(In thousands) Subsidiaries Subsidiaries Eliminations Consolidated
-------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net cash provided by operating activities $ 11,377 309 - 11,686
Cash flows from investing activities:
Capital expenditures (30,333) (1,214) - (31,547)
Proceeds from disposal of assets, net 3,238 - - 3,238
Other investing activities (1,779) (708) - (2,487)
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) investing activities (28,874) (1,922) - (30,796)
-------------------------------------------------------------------------------------------------------------------------
Cash flows from financing activities:
Net proceeds from revolving credit agreements 8,244 - - 8,244
Principal payments on long-term debt (11) - - (11)
Proceeds from (payment of) intercompany
advances (1,620) 1,620 - -
-------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used in) financing activities 6,613 1,620 - 8,233
-------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (10,884) 7 - (10,877)
Cash and equivalents at the beginning of the period 11,190 77 - 11,267
-------------------------------------------------------------------------------------------------------------------------
Cash and equivalents at the end of the period $ 306 84 - 390
==========================================================================================================================
</TABLE>
Page 11
<PAGE>
Item 2.
AVADO BRANDS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
For the Second Quarter and Six Months Ended July 1, 2001
Restaurant Sales
Consolidated restaurant sales for the second quarter and six months ended
July 1, 2001 were $176.6 million and $354.0 million, respectively, compared to
$174.5 million and $341.5 million for the same respective periods of 2000.
Increased sales were primarily attributable to increased operating capacity from
three new restaurants opened in 2001 and 19 restaurants opened in 2000. In
addition, price increases of approximately 1% and 3% at Hops and McCormick &
Schmick's, respectively, were implemented in the first quarter of 2001 and
resulted in slight increases in sales. The increased sales from new restaurants
and price increases were somewhat offset by the closing of 13 unprofitable
restaurant locations, including four Don Pablo's, three Canyon Cafes and two
Hops restaurants which were closed in January 2001 and four additional Don
Pablo's locations which were closed in March 2001. Sales increases were further
offset by a 2.9% decrease in consolidated same-store sales for the second
quarter as compared to the second quarter of 2000 (same-store-sales comparisons
include all restaurants open for 18 months as of the beginning of the quarter).
The consolidated same-store-sales decrease for the second quarter included
decreases of 12.8% at Canyon Cafe, 2.3% at Don Pablo's, 2.8% at Hops and 1.8% at
McCormick & Schmick's. On a year-to-date basis, consolidated same-store sales
decreased by approximately 1.5%. Sales in the first half of 2001 were negatively
impacted by the effects of a slowing economy and management expects such sales
impacts to continue through the third quarter and into the fourth quarter of
2001.
During the first six months of 2001, the Company opened one new Hops and
two new McCormick & Schmick's restaurants. The following table presents
restaurants open at the end of the second quarters of 2001 and 2000:
July 1, July 2,
2000 2001
----------------------------------------------------------------------
Canyon Cafe 14 16
Don Pablo's 131 138
Hops 74 70
McCormick & Schmick's 34 30
-----------------------------------------------------------------------
Total 253 254
=======================================================================
Page 12
<PAGE>
Restaurant Operating Expenses
The following table sets forth the percentages which certain items of
income and expense bear to total restaurant sales for the quarter and six-month
periods ended July 1, 2001 and July 2, 2000:
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------
Quarter Quarter Six Months Six Months
Ended Ended Ended Ended
July 1, 2001 July 2, 2000 July 1, 2001 July 2, 2000
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Restaurant sales:
Canyon Cafe 4.5% 5.6% 4.8% 5.9%
Don Pablo's 41.6% 44.2% 41.6% 44.7%
Hops 27.2% 26.8% 28.3% 27.2%
McCormick & Schmick's 26.6% 23.4% 25.3% 22.2%
------------------------------------------------------------------------------------------------------------------
Total restaurant sales 100.0% 100.0% 100.0% 100.0%
------------------------------------------------------------------------------------------------------------------
Restaurant operating expenses:
Food and beverage 28.4% 28.5% 28.3% 28.6%
Payroll and benefits 32.4% 31.3% 32.3% 31.4%
Depreciation and amortization 3.2% 3.6% 3.3% 3.6%
Other operating expenses 26.3% 23.2% 25.8% 23.3%
------------------------------------------------------------------------------------------------------------------
Total restaurant operating expenses 90.3% 86.6% 89.7% 86.9%
------------------------------------------------------------------------------------------------------------------
Income from restaurant operations 9.7% 13.4% 10.3% 13.1%
General and administrative expenses 4.5% 4.5% 4.7% 5.4%
------------------------------------------------------------------------------------------------------------------
Operating income before special charges 5.2% 8.9% 5.5% 7.8%
==================================================================================================================
</TABLE>
Restaurant operating expenses for the second quarter and six-month period
ended July 1, 2001 were 90.3% and 89.7%, respectively, compared to 86.6% and
86.9% for the corresponding periods of 2000. The resulting decreases in
restaurant operating margins for the quarter and six-month periods were
predominately due to increases in other operating expenses generated by (i) an
ongoing advertising strategy designed to build sales volumes over time at Don
Pablo's which increased advertising expenditures to 5.5% of its sales in the
first half of 2001 compared to 3.1% in the corresponding period of 2000, (ii) an
increase in utility costs affecting substantially all of the Company's
restaurants, (iii) an increase in rent expense at Hops resulting from a
sale-leaseback transaction completed in the fourth quarter of 2000 that reduced
debt and related interest expense as well as depreciation expense and (iv) an
increase in training costs at Don Pablo's related to a focus on customer service
initiatives and the timing of new-manager training. Increases in other operating
expenses were somewhat offset by a decrease in preopening expenses resulting
from three new restaurants opened in the first two quarters of 2001 compared to
11 restaurants opened in the corresponding period of 2000. Additional increases
in restaurant operating expenses were generated by an increase in payroll and
benefits due primarily to (i) efforts to improve customer service and management
turnover rates including management base pay increases implemented in the fourth
quarter of 2000 at McCormick & Schmick's, (ii) an increase in management
positions at Hops coupled with the restructuring of management bonus programs
and (iii) an increase in hourly labor as a percent of sales resulting from a
decline in sales volumes at Don Pablo's and Hops.
Further decreases in depreciation expense resulted from the June
discontinuation of depreciation related to the McCormick & Schmick's assets
which are classified as held for sale and the fourth quarter 2000 decision to
close 13 underperforming restaurants which also caused the discontinuation of
depreciation expense related to the corresponding fixed assets. Increased
restaurant operating expenses were further offset by a decrease in food and
beverage expenses. Continuing efforts to maximize purchasing synergies resulted
in all four brands achieving a decrease in food and beverage expenses compared
to the first half of the prior year.
General and Administrative Expenses and Other Special Charges
General and administrative expenses of 4.5% of sales for the quarter ended
July 1, 2001 were comparable to the second quarter of 2000. For the six-month
period ended July 1, 2001, general and administrative expenses decreased to 4.7%
of sales from 5.4% in the first half of 2000. The decrease was primarily
attributable to synergies gained from the consolidation of the Don Pablo's and
Canyon Cafe headquarters into the Madison, Georgia corporate office facility in
Page 13
<PAGE>
the second quarter of 2000. In addition, in the first quarter of 2001
certain management positions were eliminated which further reduced general and
administrative expenses. Other special charges of $1.3 million in 2001 include
severance costs of approximately $0.7 million associated with the elimination of
management positions and $0.6 million related to an abandoned site.
Interest and Other Expenses
Net interest expense for the second quarter and six-month period ended July
1, 2001 was $10.3 million and $19.4 million, respectively, compared to $9.7
million and $18.5 million for the corresponding periods of the prior year.
Increased interest charges on extended payment terms related to accounts
payable, additional amortization of deferred loan costs associated with
revolving credit agreement amendments, and interest payments made under a
fixed-to-floating interest rate swap agreement, which were somewhat offset by
favorable mark-to-market adjustments, were substantially offset by a decrease in
the average outstanding balance under the Company's revolving credit facility as
compared to 2000.
Distribution expense on preferred securities relates to the Company's $3.50
term convertible securities with a liquidation preference of $50 per security
and convertible into 3.3801 shares of Avado Brands common stock for each
security (the "Convertible Preferred Securities"). Expenses related to these
securities decreased as a result of the conversion of 842,692 of the securities
into 2,848,383 shares of common stock issued from treasury stock during 2000
coupled with 85,628 additional conversions in the first half of 2001. The
Company has the right to defer quarterly distribution payments on the
Convertible Preferred Securities for up to 20 consecutive quarters and has
deferred its December 1, 2000, March 1, 2001 and June 1, 2001 payments until
March 1, 2003 and expects to further defer these payments beyond March 1, 2003
as it continues its ongoing process of reducing leverage and increasing
profitability.
Loss on disposal of assets for the quarter ended July 1, 2001 reflects the
net result of the sale of an office facility in Bedford, Texas and the sale of
various other closed restaurant properties and miscellaneous assets.
Other expenses relate primarily to amortization of goodwill and other
miscellaneous non-operating and typically non-recurring income and expenses.
These expenses increased in 2001 due primarily to the incurrence of various tax
penalties.
Income tax benefit represents the effective rate of benefit on loss before
income taxes for the first six months of 2001. The tax rate is based on the
expected rate for the full-fiscal 2001 year.
Liquidity and Capital Resources
The Company's growth and its preference to own the real estate on which its
restaurants are situated have caused it to be a net user of cash, even after
taking into account the significant amount of financing internally generated
from operations.
Since substantially all sales are made for cash and accounts payable are
generally due in 15 to 45 days, the Company operates with negative working
capital. Fluctuations in accounts receivable, inventories, prepaid expenses and
other current assets, accounts payable and accrued liabilities typically occur
as a result of new restaurant openings and closings and the timing of settlement
of liabilities. Decreases in current asset and liability accounts occurred in
the second quarter of 2001 primarily as a result of the reclassification of the
assets and liabilities of the McCormick & Schmick's brand to "Assets held for
sale". Additional decreases in accounts payable during the first and second
quarters occurred as a result of a planned reduction in the number of days
payables were outstanding, in addition to a reduction in capital expenditures
payable. Increases in accrued liabilities, which were more than offset by the
reclassification of McCormick & Schmick's accrued liabilities, occurred
primarily as a result of increases in sales, use, property and other taxes
payable, interest accrued on the 11.75% Senior Subordinated Notes due 2009 that
was paid in July 2001; and deferred payments related to the Convertible
Preferred Securities.
In the first half of 2001, the Company continued to focus on strategies
initiated in 2000 to reduce leverage. New restaurant development plans in the
near term have been dramatically reduced from historical levels; the leasing of
new sites to reduce initial capital has taken preference over ownership; and an
Page 14
<PAGE>
aggressive program to realize cash from various operating and non-operating
assets has been implemented. In the first half of 2001, these initiatives
included the closure of 13 underperforming restaurants which generated operating
losses of $3.2 million in 2000 and the exit from two international joint
ventures. In addition, the Company completed the sale of non-core assets
totaling $7.2 million and continued suspension of the quarterly dividend payment
on the Convertible Preferred Securities. Additional financing sources in the
first six months included net proceeds of $5.0 million from the revolving credit
agreement and cash generated from operations of $2.1 million. The primary use of
funds consisted of capital expenditures of $12.4 million (including a $3.0
million reduction in capital expenditures payable) for the opening of one Hops
and two McCormick & Schmick's restaurants as well as maintenance capital for
existing restaurants. The Company does not anticipate opening any additional
restaurants in 2001. Maintenance capital for existing restaurants for the
remainder of 2001 is expected to be approximately $4 to $6 million. The Company
does not currently have any capital commitments for new restaurants extending
beyond 2001 and will evaluate potential new restaurant openings in 2002 based on
projected return on investment and capital availability.
On April 2, 2001, the Company executed an amended and restated credit
agreement which provided a revolving line of credit of $95.8 million and letters
of credit of $10.9 million. The revolver included scheduled commitment
reductions of $10.0 million on May 31, 2001, September 4, 2001 and December 31,
2001. The remaining commitment of $65.8 million was to mature on March 29, 2002.
In connection with the pending sale of McCormick & Schmick's, during June the
Company executed an addendum to the credit agreement which retroactively waived
the May 31, 2001 commitment reduction. The addendum also accelerated the
maturity of the revolving credit facility to August 21, 2001 at which point
those obligations due under the facility shall be payable in full. At July 1,
2001 the facility was fully drawn. The credit agreement includes various
provisions which, among other things, require the Company to (i) maintain
defined net worth and coverage ratios, (ii) maintain defined leverage ratios and
(iii) achieve a defined quarterly earnings before interest, taxes, depreciation
and amortization ("EBITDA") amount. At July 1, 2001, the Company was not in
compliance with the EBITDA requirement.
The Company anticipates substantially completing the sale of 33 of its 34
McCormick & Schmick's restaurants during August 2001. Estimated proceeds of
$119.3 million from the initial transaction will be used to repay the amount
outstanding under revolving credit portion of the credit facility thereby
terminating the lenders' obligation to make further revolving loans under the
agreement. The lenders under the facility are expected to continue to provide
approximately $10.9 million in letters of credit that secure the Company's
self-insurance programs. Of the remaining sale proceeds of $23.5 million, $6.0
million will be used to partially cash collateralize the letters of credit, $6.3
million will be used to satisfy the Company's portion of outstanding obligations
related to McCormick & Schmick's, $4.3 million will be used to pay fees and
expenses associated with the transaction and the balance will be available for
past due amounts. The remaining restaurant is located in an area where transfer
of permits to the new owners is a more lengthy process and, as a result, the
closing on that restaurant, with proceeds totaling $4.2 million, is expected in
the fourth quarter of 2001. The Company anticipates using these proceeds to more
fully cash collateralize its letters of credit. If the Company is unable to
complete the closing of the McCormick & Schmick's transaction prior to the
August 21, 2001 maturity of its credit facility, management believes it will be
able to extend the agreement.
Interest payments on senior and subordinated notes approximate $11.6
million semi-annually in each June and December. Under the terms of the related
note indentures, the Company has an additional 30-day period from the scheduled
interest payment dates before an event of default is incurred and the Company
utilized these provisions with respect to its June 2001 interest payments.
Accordingly, the interest payment related to the senior notes was made on June
26, 2001 and the interest payment related to the subordinated notes was made on
July 16, 2001.
As a result of the deferral of the June 2001 interest payment on the
subordinated notes to the third quarter, total interest payment requirements for
the second half of 2001, including estimated interest related to the revolving
credit facility incurred prior to repayment, will be approximately $18.7
million. In addition, maintenance capital is expected to approximate $4 to $6
million. Management believes that cash flow from operations and the sale of
other assets should be sufficient to satisfy its interest obligations and
projected capital expenditures remaining in 2001. Excluding the McCormick &
Schmick's division, assets held for sale totaled $8.1 million at July 1, 2001.
The following table presents semi-annual, pro forma earnings before interest,
taxes, depreciation and amortization ("EBITDA"), assuming the sale of McCormick
Page 15
<PAGE>
& Schmick's had been completed as of the beginning of the periods presented
(amounts in thousands):
Six Months Six Months Six Months
Ended Ended Ended
July 1, 2001 July 2, 2000 Dec. 31, 2000
------------------------------------------------------------------------------
Consolidated EBITDA $ 32,213 39,505 15,554
McCormick & Schmick's EBITDA 11,636 8,868 11,540
------------------------------------------------------------------------------
Pro forma EBITDA $ 20,577 30,637 4,014
==============================================================================
The Company is estimating EBITDA for the six months ended December 30, 2001
of approximately $13.5 million, which includes EBITDA of $3.0 million related to
the pre-sale operations of McCormick & Schmick's. While management believes that
cash flow from operations supplemented by proceeds from the sale of closed
restaurant properties and other assets held for sale will be sufficient to
enable the Company to meet its obligations, these proposed asset sales are not
presently subject to binding agreements. There can be no assurance that the
Company will be able to satisfy its interest obligations and capital expenditure
requirements in 2001 without generating proceeds from sales of these assets or
from raising additional debt or equity capital.
At July 1, 2001, the Company held notes receivable from Tom E. DuPree, Jr.,
the Chairman of the Board and Chief Executive Officer, totaling $10.9 million,
$3.0 million of which are secured by real estate owned by Mr. DuPree. The notes
mature on June 30, 2002 and bear interest at 11.5%, payable at maturity. At July
1, 2001, the notes plus approximately $2.3 million in accrued interest were
included in "Other assets" in the accompanying consolidated balance sheet. The
Company, Mr. DuPree and the Board of Directors are currently investigating
various payment, security and extension alternatives and, as such, the notes and
related accrued interest continue to be classified as noncurrent assets at July
1, 2001.
Effect of Inflation
Management believes that inflation has not had a material effect on
earnings during the past several years. Future inflationary increases in the
cost of labor, food and other operating costs could adversely affect the
Company's restaurant operating margins. In the past, however, the Company
generally has been able to modify its operations to offset increases in its
operating costs.
Various federal and state laws increasing minimum wage rates have been
enacted over the past several years. Such legislation, however, has typically
frozen the wages of tipped employees at $2.13 per hour if the difference is
earned in tip income. Although the Company has experienced slight increases in
hourly labor costs in recent years, the effect of increases in minimum wage have
been significantly diluted due to the fact that the majority of the Company's
hourly employees are tipped and the Company's non-tipped employees have
historically earned wages greater than federal and state minimums. As such, the
Company's increases in hourly labor costs have not been proportionate to
increases in minimum wage rates.
Forward-Looking Information
Certain information contained in this quarterly report, particularly
information regarding the future economic performance and finances, restaurant
development plans, capital requirements and objectives of management, is forward
looking. In some cases, information regarding certain important factors that
could cause actual results to differ materially from any such forward-looking
statement appear together with such statement. In addition, the following
factors, in addition to other possible factors not listed, could affect the
Company's actual results and cause such results to differ materially from those
expressed in forward-looking statements. These factors include competition
within the casual dining restaurant industry, which remains intense; changes in
economic conditions such as inflation or a recession; consumer perceptions of
food safety; weather conditions; changes in consumer tastes; labor and benefit
costs; legal claims; the continued ability of the Company to obtain suitable
locations and financing for new restaurant development; government monetary and
fiscal policies; laws and regulations; and governmental initiatives such as
minimum wage rates and taxes. Other factors that may cause actual results to
Page 16
<PAGE>
differ from the forward-looking statements contained in this release and that
may affect the Company's prospects in general are described in Exhibit 99.1 to
the Company's Form 10-Q for the fiscal quarter ended April 2, 2000, and the
Company's other filings with the Securities and Exchange Commission.
New Accounting Pronouncements
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations", which is effective for all business combinations initiated after
June 30, 2001. SFAS 141 requires companies to account for all business
combinations using the purchase method of accounting, recognize intangible
assets if certain criteria are met, as well as provide additional disclosures
regarding business combinations and allocation of purchase price. The Company
will adopt SFAS No. 141 as of July 1, 2001, and the impact of such adoption is
not anticipated to have a material adverse impact on the Company's financial
statements.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets", which requires nonamortization of goodwill and intangible assets that
have indefinite useful lives and annual tests of impairments of those assets.
The statement also provides specific guidance about how to determine and measure
goodwill and intangible asset impairments, and requires additional disclosure of
information about goodwill and other intangible assets. The provisions of the
statement are required to be applied starting with fiscal years beginning after
December 15, 2001 and applied to all goodwill and other intangible assets
recognized in financial statements at that date. The Company will adopt SFAS 142
effective at the beginning of its fiscal 2002 year, and has not completed its
evaluation of the impact, if any, that adoption of the statement will have on
its consolidated financial position or results of operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
changes in commodity prices. Exposure to interest rate risk relates primarily to
variable U.S.-based rates and foreign-based rate obligations on the Company's
revolving credit agreement and a fixed to floating interest rate swap agreement,
respectively. Interest rate swap agreements have historically been utilized to
manage overall borrowing costs and balance fixed and floating interest rate
obligations. Currently the Company has only one such swap agreement in place.
Under the agreement, which has a $115.0 million notional amount and terminates
on March 1, 2008, the Company pays an average of certain foreign LIBOR-based
variable rates (8.5% at July 1, 2001) and receives a fixed 7% rate tied to the
Convertible Preferred Securities. The agreement has served to reduce the
Company's exposure to U.S. interest rates and also contains an interest rate cap
which further limits interest rate exposure.
At the beginning of the fourth quarter of 2000, the Company adopted SFAS
133. Although the Company's swap agreement is an effective diversification of
interest rate exposure, it does not qualify for fair value hedge accounting
under SFAS 133. As such, the Company has recorded the swap agreement at fair
value in the accompanying consolidated balance sheets and records fluctuations
in the fair value on a mark-to-market basis as an adjustment to interest
expense. At July 1, 2001, the settlement or fair market value of the agreement
was $8.8 million. If interest rates related to the swap agreement increased by
100 basis points over the rates in effect at July 1, 2001, interest expense for
the remainder of fiscal 2001 would not be materially impacted due to the
interest rate cap protection which limits the rate paid by the Company to 8.5%.
However, a decrease in rates could result in a significant fair value increase.
Such a rate decrease followed by an increase in rates could result in
significant volatility in the fair value of the contract and corresponding
volatility in the Company's earnings per share.
The Company purchases certain commodities such as beef, chicken, flour and
cooking oil. Purchases of these commodities are generally based on vendor
agreements which often contain contractual features that limit the price paid by
establishing price floors or caps. As commodity price aberrations are generally
short-term in nature and have not historically had a significant impact on
operating performance, financial instruments are not used to hedge commodity
price risk.
Page 17
<PAGE>
Part II. Other Information
--------------------------
Item 4. Submission of Matters to a Vote of Security Holders
-----------------------------------------------------------
The annual meeting of shareholders was held on May 2, 2001, at which the
following proposals were voted upon by shareholders: (1) the election of eight
members to the Board of Directors, (2) a proposal to approve an amendment to the
Company's Articles of Incorporation to effect a one-for-four reverse split of
the Company's common stock and (3) ratification of the selection of KPMG LLP as
the Company's independent auditors.
Each of the eight members of the Company's Board of Directors was elected
to serve a term of one year and until his or her successor is elected, and has
qualified by the following votes:
Affirmative Negative
----------- ---------
Tom E. DuPree, Jr. 21,935,663 5,070,624
Erich J. Booth 22,058,424 4,947,863
Margaret E. Waldrep 21,927,663 5,078,624
William P. McCormick* 26,674,212 332,075
Jerome A. Atkinson 26,673,979 332,308
William V. Lapham 26,672,069 334,218
Emilio Alvarez-Recio 26,666,369 339,918
Robert Sroka 26,672,279 334,008
* In conjunction with the with the sale of McCormick & Schmick's, William
P. McCormick has resigned from the Board of Directors
The remaining proposals voted on at the May 2, 2001 annual meeting of
shareholders were approved as follows:
Affirmative Negative Abstaining
----------- -------- ----------
Approval of reverse stock split 26,257,698 724,329 24,260
Appointment of KPMG LLP 26,919,960 74,092 12,235
Item 6. Exhibits and Reports on Form 8-K
----------------------------------------
(a) Exhibits.
11.1 Computation of earnings per common share
99.1 Safe Harbor Under the Private Securities Litigation Reform Act of
1995*
* Incorporated by reference to the corresponding exhibit to the Company's
Quarterly Report on Form 10-Q for the quarter ended April 2, 2000.
(b) Reports on Form 8-K.
The Company filed a Current Report on Form 8-K, dated June 7, 2001, which
disclosed, pursuant to Item 5, the Company's intent to sell its McCormick &
Schmick's brand. The report also included pro forma financial statements
pursuant to Item 7 of Form 8-K.
Page 18
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Avado Brands, Inc.
(Registrant)
Date: August 20, 2001 By:/s/Erich J. Booth
-----------------------------
Erich J. Booth
Chief Financial Officer
and Corporate Treasurer
Page 19
</TEXT>
</DOCUMENT>